Extended insolvency protections to benefit small businesses

The Federal government has announced that it is extending the temporary insolvency and bankruptcy protections that have been put in place to support struggling small businesses impacted by the COVID crisis.

With the extension in place, the regulations that diminish the threat of creditors taking action against a small business impacted by trading restrictions as a result of the crisis have now been extended to 31 December 2020. This change also entails the extension of temporary relief for directors from any personal liability due to trading while insolvent.

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell welcomed the measure, saying that the measures are necessary and that they will help to give small businesses more time to recover from the impacts of the pandemic and also prevent a wave of unnecessary insolvencies.

“While we support this temporary relief for financially distressed businesses, there will also be a number of zombie businesses kept artificially afloat as a consequence,” Carnell said.

“ASIC data shows insolvencies are tracking at close to 50 per cent below 2019 levels, which goes to show the extent to which government stimulus and protection measures are keeping businesses on life support, including businesses that have not been viable for some time.

The Ombudsman pointed out that Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure, highlighting the critical need for small businesses have their ongoing viability assessed by a financial adviser.

“My office continues to recommend the establishment of a small business viability voucher program, where small business owners facing financial stress can obtain a voucher valued up to $5,000 to access tailored advice on the state of their business,” Carnell said. “The voucher would ensure small businesses have access to the expertise they need to judge business viability.

“Unfortunately, small businesses with cashflow issues, compounded by falling revenue, may not seek out professional advice because it’s deemed to be unaffordable,” Carnell added. “This could prove to be devastating for the business owner and their family, down the line. We know the sooner a small-business owner experiencing financial stress seeks assistance from an accredited professional, the better the outcome.”

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